Cryptocurrencies, particularly Bitcoin (BTC), have become a hot topic in the world of investing. How to invest in Bitcoin is a question many may ask. In recent years, the popularity of Bitcoin has skyrocketed, attracting many investors to the digital currency market. Despite the cryptocurrency market being relatively new and largely unregulated, many investors have found it to be a profitable avenue.
As such, it’s crucial for anyone interested in crypto to know the main ways how to invest in Bitcoin. This article aims to provide a comprehensive guide on how to invest in Bitcoin, exploring various methods to invest in digital currency, including centralized exchanges, peer-to-peer trading, and other platforms.
Before we delve into how to invest in Bitcoin, let’s take a quick look at what it is and why it has become so popular.
What is Bitcoin, and why is it so popular?
Some people mistook crypto for commodities or stocks, but there is no such thing as “how to invest in Bitcoin stock.” Bitcoin is a digital currency that operates on a decentralized network. Unlike traditional currencies, Bitcoin is not backed by any government or financial institution. Instead, it operates independently, using blockchain technology to verify transactions and maintain a secure and transparent ledger of all Bitcoin transactions.
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The popularity of Bitcoin can be attributed to several factors. Firstly, it provides an alternative to traditional financial systems, which many people have lost faith in following the Global Financial Crisis of 2008. Secondly, the anonymity that Bitcoin offers has made it a popular choice for people who value their privacy. Finally, the potential for high returns has attracted many investors to the market.
Most investors ask themselves how to invest in Bitcoin and make money at the same time, as the crypto market is very volatile. The answer almost always lies in patience, as Bitcoin rises in the long run (look at the chart below). Now that we have a basic understanding of what Bitcoin is and why it’s so popular let’s explore the various methods for investing in it.
Exponential Rainbow chart of Bitcoin, source: blockchaincenter
Investing in Bitcoin through centralized exchanges
One of the most popular ways to invest in Bitcoin is through centralized exchanges (CEX). A centralized exchange is a platform that acts as a middleman between buyers and sellers, allowing them to trade cryptocurrencies for fiat currencies or other cryptocurrencies. Some of the most popular centralized exchanges include Coinbase, Binance, and Kraken.
Most trading activity is done with Bitcoin against stablecoins, such as USDT or USDC (e.g. BTC/USDT). However, people may find many different trading pairs like Bitcoin against Ethereum (BTC/ETH), or Litecoin (BTC/LTC). Usually, the more popular the cryptocurrency, the more trading pairs available.
Buying Bitcoin on Binance, source: binance.com
To invest in Bitcoin through a centralized exchange, an investor will first need to create an account on the platform. This involves providing their personal information, such as name, email address, and phone number, as well as completing a verification process to ensure compliance with anti-money laundering (AML) and know-your-customer (KYC) regulations.
Once the account is verified, an investor needs to deposit fiat currency, such as US dollars or euros, into their account using a bank transfer or credit/debit card. Once the funds are deposited, investors can use them to purchase Bitcoin or other cryptocurrencies on the platform.
Buying Bitcoin peer-to-peer
Investing in Bitcoin through peer-to-peer (P2P) trading is another method for investors to buy and sell Bitcoin directly with other individuals without the need for a middleman. P2P trading companies such as hodlhodl or localcryptos offer a platform to connect buyers and sellers to facilitate these transactions.
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P2P platforms are the most popular of choice in developing countries, where they are unable to go through KYC on CEXes. To invest in Bitcoin through P2P trading, the investor will first need to create an account on a P2P trading platform. After setting up an account, the investor can then browse listings of other users who are selling Bitcoin and select a seller who offers a price that suits them.
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Fees may vary from country to country and depend on volatility, but they are usually significantly higher than buying bitcoins on CEXes. Once a suitable seller is found, the investor can initiate a trade, and the P2P trading platform will hold the Bitcoin in escrow until the trade is complete.
After the trade is complete, the Bitcoin is released from escrow and sent to the investor’s crypto wallet. It is essential to exercise caution and ensure the legitimacy of the transaction and the reputation of the seller when using P2P trading platforms.
Investing in Bitcoin through other ways
In addition to CEXes and P2P websites, there are several other ways how investors can buy and sell Bitcoin. One of them is Bitcoin ATMs. These Bitcoin ATMs are physical machines that allow users to buy and sell Bitcoin and other cryptocurrencies for cash. Users should be aware that these ATMs may have hefty fees somewhere between 2-10%.
Bitcoin futures are another way of buying Bitcoin on centralized exchanges. Bitcoin futures are financial contracts that allow investors to speculate on the future price of Bitcoin. So when an individual buys a futures contract, they don’t own Bitcoin but a futures contract for Bitcoin, which could be perpetual.
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Trading futures may be riskier than buying Bitcoin itself because users use high leverage (up to 1:125), and can wipe out their balance. Futures are more suitable for traders, so investors should avoid leverage as much as they can. For traders, there are also other ways to trade Bitcoin through CFDs, margin trading, etc.
Bitcoin miner, source: cnbc.com
Bitcoin mining used to be easy in its beginnings, but it got difficult over time. Nowadays, it requires powerful hardware and capital to start, which is why it’s not so popular anymore. Bitcoin mining is the process of verifying Bitcoin transactions and adding them to the blockchain. In exchange for verifying these transactions, miners are rewarded with newly created bitcoins.
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While Bitcoin mining can be a profitable way to invest in Bitcoin, it’s also a highly competitive and resource-intensive process. To mine Bitcoin, the miner will need specialized hardware and software, as well as a significant amount of electricity. However, some creative individuals found a way to use sustainable energy to mine Bitcoin.
Factors to consider before investing in Bitcoin
Before investing in Bitcoin, there are several factors that investors should consider to ensure that they make an informed decision. These include:
- Volatility: Bitcoin is a highly volatile asset, and its price can fluctuate rapidly. Investors should be prepared for the possibility of significant price swings and consider this when making their investment decision.
- Regulation: While Bitcoin operates on a decentralized network, it’s still subject to regulatory oversight in many countries. Investors should be aware of the regulatory landscape in their jurisdiction and any potential changes that could impact their investment. For example, China has banned crypto, but El Salvador supports it.
- Security: Investing in Bitcoin requires investors to store their Bitcoin in a digital wallet, which can be susceptible to hacking and theft. Investors should take measures to ensure the security of their wallets, such as using a hardware wallet to secure offline storage. Moreover, investors can store private keys to their wallets and use 2-factor authentication methods to ensure maximum safety.
How much to invest in Bitcoin, you may ask. You surely shouldn’t go all in dreaming of becoming rich overnight. That’s not investing, but gambling. Investing in Bitcoin can be a profitable way to diversify your investment portfolio, but it’s important to approach it with caution and do your due diligence. Many investors prefer dollar-cost averaging because it lowers the risk and pressure in the process.
By understanding the various methods for investing in Bitcoin, as well as the risks and factors to consider, investors can make informed investment decisions and potentially reap the benefits of this innovative asset.